Abstract: ABC has become mature cost estimation and accounting strategies. Using ABC for cost estimation of manufactured parts is being practiced today with acceptable rate of success. The objective of this study is to present strategies to evaluate the cost in Flexible Manufacturing System (FMS) with A(2)-degree automation for produced parts. For this goals, by using Activity-based Costing (ABC), first find the requirement resources and activities of parts and then, evaluated the cost of the uses the especially formulas. With implementation of ABC and using accounting formulas, the cost of a part equals the cost of raw materials plus the sum of the costs of all activities used to produce the part. Finally, comparison and analysis between ABC and Traditional Cost (TC) are presented in this research.
INTRODUCTION
Traditional cost systems are known to distort the cost information by using traditional overhead allocation methods (that rely on direct resources such as labour hours). Activity-based Costing (ABC), on the other hand, has gained the recognition of a more accurate cost estimation and calculation method (Ben-Arieh and Qian, 2003).
Activity-based costing was introduced by Kaplan and Cooper (1988a, b) as an alternative to traditional accounting techniques. Since then, it has been increasingly used in multi-level, complex manufacturing organizations. ABC is a procedure that often makes it possible to estimate product costs more accurately than traditional cost systems. Research on the determinants of ABC system implementation effectiveness has identified contextual and implementation process factors that correlate with evaluations of the ABC system. These studies define factors that relate the ABC implementation initiative to the broader organization. For example, Foster and Swenson (1997) and Shields (1995) examine whether the initiative is perceived to have top management support and whether users believe there are benefits associated with adopting ABC. ABC is often used as a part of total cost management. ABC system differs from traditional system in two ways: first, cost pools are defined as activities rather than production cost centers and secondly, the cost drivers used to assign activity costs are structurally different from those used in traditional cost systems. The purpose of an ABC system is to focus on the cause behind indirect costs. Activities, rather than traditional departments, are emphasized in order to isolate the cost drivers or factors most likely to cause or contribute to the in occurrence of costs (Lewis, 1995).
ABC has been applied to various industries (Tsai, 1996) such as electronics (Merz and Hardy, 1993), automotive (Miller, 1994), aerospace and defense (Soloway, 1993), airplane manufacturing (Haedicke and Feil, 1991), shipbuilding (Porter and Kehoe, 1994) and telecommunication (Hodby et al., 1994), among many other areas of application. Sriram (1995) studied how flexible manufacturing systems affect the accounting information system of an organization switching to FMS.
The objective of this research is to present strategies to evaluate the cost in FMS with A(2)-degree automation for produced parts. For this goals, by using ABC, first find the requirement resources and activities of parts and then, evaluated the cost of the uses the especially formulas. With implementation of ABC and using accounting formulas, the cost of a part equals the cost of raw materials plus the sum of the costs of all activities used to produce the part. This model has been applied in a forging industry. Finally, comparison and analysis between ABC and TC are also presented.
CASE STUDY
Iran Tractor Forging Co. produces high quality forgings, primarily for the customer oriented automotive and industrial market. Forging lines from 2 to 80 MN give us capability for forging from a few hundred grams up to about 100.
The case study selected in this research involves a forging plant that Based on G. Amber and P. Amber laws (Automation criteria) has A(2)-degree automation. The main objective of this case study is to demonstrate the method of designing an ABC system in a flexible manufacturing system with especially automation degrees and the implications of ABC on the operations control and the determination of the actual cost of parts. The plant produces different parts in every month with especially operational plan per parts. The activities performed during the production can be divided into the following operations:
Cutting, heating then rolling, forming, trimming, inspection and experiment, heat treatment, shot blasting and end-control.
Some of the operations such as rolling (that has 0, 1, 2, 3 or 4 step based on the operational plan and type part), forming (that has 1, 2 or 3 step based on the operational plan and type part) and trimming (that has piercing, clipping or hot setting step based on the operational plan and type part) are more important.
IMPLEMENTATION OF ABC IN ACTUAL SYSTEM
As a starting point, we show the ABC cost model in Table 1. Twelve resources are considered: direct labor, production line, cutting, heat treatment, shot blasting, raw material, maintenance, control and inspection, setup, energy, vehicles and others. As a resource, direct labor or production line is consumed by the activity of processing (cutting, rolling, pressing, heat treatment and shot blasting). Maintenance, control and inspection, setup, energy, vehicles and others are a resources are consumed by the activity of preventive/repair (p/r) maintenance, supervising (quality control), tolling and fixture, utility, material handling and line stop of the products, respectively. Raw material resource is consumed by the activity of processing.
The activity-product cost drivers are also shown in Table 1. The procedures used in calculating costs by TC and by ABC are given in Table 2. In TC, indirect costs are calculated by using a coefficient factor multiplier and direct costs. Using ABC, indirect costs are calculated directly as the sum of p/r maintenance, supervising labour, tolling and fixture and utility costs, production line time costs and material handling costs. Based on data in the Table 1 and 2 the cost data for resources are shown in Table 3.
RESULTS AND DISCUSSION
Table 4 shows the demands of parts. Also, Table 5 shows the summery stop-watch studies such as processing time in production line and weight of parts before (initial weight)/(part weight) after production line operation for 6 parts that doing for requirement data in accounting formulas.
| Table 1: | ABC model |
| Table 2: | Formulas utilized to calculate costs of a part |
| Table 3: | Cost data for resources |
| Table 4: | Three months production demands |
Based on the calculation procedure presented in section 3, cost components are calculated by TC and using ABC in Table 6, 7 and 8, respectively.
In Table 6 and 8, total cost shown for comparison of Activity-Based Costing of Part with Traditional Costing of Part based on indirect cost. In the TC’s estimations, we saw intense fluctuations of costs, but in the curve of ABC these fluctuations are moderate. These estimations show a Considerable difference between the ABC and TC estimates. The essence of TC lies in the concept that directs costs, direct labor and/or direct materials-constitute the basis for the allocation of indirect costs. Normally, the indirect cost is calculated by multiplying the direct cost by a coefficient constant. The value of this constant is based on experience. Before the advent of modern manufacturing technologies and the change from production-driven to market-driven economic environments, TC methods were adequate due to two reasons:
| • | The fraction of total product cost due to the direct cost component was substantially larger than the indirect cost component. |
| • | The indirect cost component was-and is-inherently more expensive to determine than the direct cost component. |
As a result, TC was considered satisfactory for general purposes.
Figure 1 and 2 show intensity dependence of direct and indirect costs (finally actual cost) to cost driver (For part sample: TF25). In Fig. 2 we consider intensity dependence of part cost to cost driver of line production activity (that this activity to be depended on operational plan and sequence of part). As well as, for other parts we have same bar cure, so TC can not estimated the actual cost of parts accurately.
According to above statement and with due attention to calculating of indirect costs in TC is possible that one activity to not be accomplished on part (or this activity to spend less operation time in individual operation), but the cost of this activity calculated for that part.
| Fig. 1: | Intensity dependence of direct costs (final actual cost) with
cost driver (For part sample: TF25) |
| Table 5: | Requirement data for computation |
| Table 6: | Computing total cost of parts with TC |
| Table 7: | Computing indirect cost for ABC |
| Table 8: | Computing total cost of parts with ABC |
| Fig. 2: | Intensity dependence of indirect costs (final actual cost)
with cost driver (For part sample: TF25) |
In other words, the TC tends to underestimate the time it takes to make a prototype part and to adjust the manufacturing parameters (which is the major part of the cost). The discrepancy between the ABC and traditional cost estimates grows as the parts become more complex, which require more extensive development and experimentation with the manufacturing procedures.
CONCLUSIONS
Cost management has tended to view all costs not directly attributable to producing a given unit (chiefly labor and raw materials) as an overhead. The assumption is that these overheads are fixed. ABC challenges this assumption and more importantly, presents us with a method of calculating costs that vary with factors other than unit volume. Crucially, ABC represents a way of demonstrating what many managers have always suspected-that the amount of work (and potentially its cost) varies with overall levels of activity in the firm. When the firm is busy, everyone is busy-even those areas that we would expect not to vary with activity such as personnel management.
It is clear that ABC costing provides more accurate cost information than that of the traditional costing methods. So, we can use this information to initiate improvements. The costing at part level or sub-operation level helps the management to make a make or buys decision. The analysis of activities to identify activities and bench marking at each activity level direct improvement efforts in the right direction.
Therefore, forging plant should use ABC for all of their parts to calculate the cost of them and produce profitability accurately. The cost driver of each activity can be used to measure the performance of activities. The benefits to the manufacturing from using Activity-Based Costing include support for estimation of new parts, control of part manufacturing in term of cost and task accomplished and performance evaluation for the various activities.
ACKNOWLEDGMENT
We would like to express our appreciation for all the help and assistance rendered to us by Iran Tractor Forging Corporation through Mr. Aghdashi and Mr. Khosravi.